Haivision Systems Inc.

Thank you all for standing by. At this time, I would like to welcome everyone to the High Vision second quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I would now like to turn the call over to Mirko Wicca, President, CEO, and Chairman. You may now begin.

Thank you, Tracy. Good morning, everyone, and thank you for joining us for our earnings call to discuss the second quarter of fiscal 26, which ended in April 30th. Our second quarter unfolded against one of the most complex global operating environments we've seen in recent years. In heightened geopolitical tensions, including the conflict in the Middle East, ongoing supply chain volatility, component availability challenges, And customer procurement delays have created uncertainty across many of the markets we serve. As a result, some customer programs and capital spending decisions have shifted to the right, impacting the timing of some revenue recognition. Now, while these short-term headwinds have affected our near-term performance, they have not altered the underlying fundamentals of our business or the long-term demand drivers for our technology. In fact, we believe the secular trends supporting our company are stronger than ever. The increasing need for defense and intelligence capabilities, public safety modernization, critical infrastructure protection, cybersecurity resilience, enterprise security, and government digital transformation continues to create significant opportunities for our solutions worldwide. Our customers' missions have not changed. Their priorities have not changed. In many respects, they have become even more critical in today's geopolitical environment. Therefore, we remain focused on executing our long-term strategy rather than reacting to temporary market volatility. We are making substantial investments to modernize and strengthen our technology portfolio across both our mission systems and broadcast and media businesses. This includes a comprehensive refresh of our product roadmaps, next generation platforms, software capabilities, AI-enabled solutions, and integrated technologies designed to meet evolving customer requirements. We've been very, very busy with this transformation the past 18 months and will continue to do so throughout fiscal 2027. Now, these investments are intentional. They position the company not simply for the next quarter or the next fiscal year, but for a new cycle of growth that we expect to accelerate through fiscal 28 and 29 and beyond. We have successfully navigated challenging market environments before. Our balance should remain solid, our customer relationships are deep, and our markets are strategically important and supported by long-term structural demand. And while we expect some near-term volatility as customers work through procurement cycles and global supply chains continue to normalize, we remain highly confident in our long-term outlook. We believe the actions we are taking today will strengthen our competitive position, expand our addressable markets, and create meaningful shareholder value over the coming years. Our strategy is clear. Maintain operational discipline, continue investing in innovation, support our customers' critical missions, and position the company to capitalize on the significant growth opportunities ahead. I appreciate the continued support of our customers, employees, shareholders, and partners, and we look forward to updating you on our progress as we execute against our strategic objectives. Dan, can you please continue with the detailed financials?

Thank you, Mirko. Revenue for the second quarter of fiscal 2026 was 32 and a half million, representing a decrease of 1.8 million. for 5.1% compared with the prior year period. Since our last earnings call on March 13th, the operating environment has become meaningfully more complex. Several external factors affected customer decision making, procurement timing, and near-term purchasing patterns during the quarter. First, the conflict in the Middle East created additional uncertainty across several end markets. At the time of our last call, the U.S. bombing campaign had begun less than two weeks earlier, and market expectations around the duration and scope of the engagement were still evolving. The subsequent announcement of the blockade of the Strait of Hormuz a month after the earnings call added another layer of macroeconomic and geopolitical uncertainty, particularly around energy markets and broader customer planning. Within the defense sector, We have not seen evidence of a structural demand issue. Rather, the pressure we experience related primarily to procurement timing. Defense spending is being directed towards urgent readiness priorities, including air defense, counter drone capabilities and replenishment needs. At the same time, broader modernization programs remain subject to normal budget cycles, approval processes and program gates. One large defense program in particular is expected to contribute to lower purchasing levels in the near and medium term as assets associated with that program are currently deployed and there is no defined timetable for their return. This has affected the timing of expected purchases, though we continue to believe the underlying requirement remains intact. Second, artificial intelligence has become a major investment priority across many customer segments. We are seeing significant investment in infrastructure projects and customers are increasingly evaluating how AI will affect their own businesses, technology roadmaps and capital allocation decisions. In the enterprise market, this has contributed to longer IT approval cycles. Buyers are prioritizing AI infrastructure, cybersecurity, cloud optimization, and cost reduction initiatives ahead of more discretionary communications and video refresh projects. In the broadcast space, we continue to see constrained media technology budgets, disciplined capital spending, and heightened scrutiny of return on investments for cloud, IP, remote production, and infrastructure upgrades. Related to this, we noted on our last earnings call that the global memory semiconductor market has entered a tight supply cycle driven largely by demand from AI data centers and high-performance computing applications. That trend has continued. Memory prices are increasing, and memory and server manufacturers are prioritizing AI-optimized products, which is further constraining supply for other server configurations. In response, we are monitoring supply chain conditions closely, making incremental investments when deemed necessary. We've also changed how we quote server-based solutions. Servers are now offered as a separate line item rather than bundled with software into an appliance-like offering. This gives customers greater purchasing flexibility. They may purchase software-only or virtual machine options, purchase servers through HiVision, or source servers through their own supply channels. This approach is intended to protect HiVision from volatility in server input costs and preserve margin discipline. At the same time, it may reduce reported top line revenue by as much as $2 million, depending on the extent to which customers elect to source server hardware independently. Despite the second quarter revenue decline, our year-to-date performance remains positive. For the first half of fiscal 2026, total revenue was 76.8 million, an increase of 5.3 million, or 8.5%, compared with the same period in the prior year. Our recurring revenue from maintenance support contracts and cloud services continues to be sound. Recurring revenue in the first quarter was 7.1 million, or about 22% of total revenue. On the year-to-date basis, recurring revenue is 14.4 million, or 21.3% of total revenue. Gross margins for the second quarter of fiscal 2026 was 68.9%. That's a decline of 410 basis points compared with the prior year period. And on a year-to-date basis, gross margins were 69.7%, representing a decline of 200 basis points compared with the same period in the prior year. As we discussed in our last earnings call, gross margin performance continues to be affected by product and revenue mix. In particular, we highlighted three factors, increased transmitter sales, higher sales of HMP solutions installed on servers and sold as an appliance-like offering, and the timing of deliveries to a large defense customer, which reflects legacy activities from our systems integrator business. Those product sets carried lower gross margins than our corporate average and affected both first quarter results and year-to-date performance. Although all three factors affected year-to-date performance, in the second quarter, the gross margin decline was driven primarily by the magnitude and composition of deliveries to a large defense customer. This quarter, in fact, represented the highest level of deliveries to that customer under the existing agreement, with revenue from those deliveries increasing approximately threefold compared with the same period last year. However, the mix of those deliveries was weighted heavily towards lower-margin third-party components rather than the higher-margin proprietary high-vision products. As a result, while the volume of deliveries was strong, the margin contribution was below our typical profile. Perhaps in the consolation, approximately 3 million of proprietary products deliveries shifted from the second quarter into the third quarter due to supply chain constraints. Those deliveries are expected to carry a more favorable margin profile and would have improved the second quarter mix had they shipped as originally planned. Overall, the second quarter margin decline was primarily a function of revenue mix and delivery timing. With that said, we are facing gross margin pressure reflecting higher component costs and constrained availability across memory and compute-related inputs. Technology manufacturers using memory, GPUs, CPUs, SSDs, NICs, or FPGAs are facing increasing purchases through brokers, higher bond costs, longer lead times, allocation risk, and expedite fees. This is creating allocation dynamics and upward pricing pressure. To illustrate the point, the number of component end of life events affecting our active production has accelerated and has doubled in the last six months compared to the previous six months. And equally important, The number of component end of life events received with no opportunity for last time by windows has climbed sharply. We are taking pricing sources and design actions, including incremental investments in inventory. Cost increases are flowing through faster than customer price adjustments, creating near term midterm margin compression. Total expenses this quarter were 25.6 million, down 2.6 million from the prior year comparative period. Although still a favorable comparison, the prior year period did include a non-recurring expense of 1.5 million related to legal settlements and related fees. To further frame our total expense levels, last quarter, which is our first quarter of fiscal 2026, total expenses were 25 million. And total expenses for the quarter before that, our fourth quarter of fiscal 2025, were $25.4 million. In fact, total expenses for the last five quarters have averaged about $25.2 million. As we have stated on previous calls, our objective this year is to maintain the current level of expenses. I think it's fair to say that thus far we are meeting that objective. On a year to date basis, Total expenses are $50.6 million, flat with prior year. The non-recurring expenses incurred in fiscal 2025 were $1.7 million, but they were offset this year by incremental investments made in research and development to support our product realization calendar, share-based compensation, which varies based on the timing, the magnitude, and the nature of the long-term incentive grants, and compensation, travel, and promotional expenses incurred in the G&A line item. Looking forward, there is some positive news. This August represents the five-year anniversary of the HiVision MCS acquisition. Thus, technology purchased as part of that acquisition will have been fully amortized, reducing total expenses by about $600,000 per quarter. The following April will be our five year anniversary of the High Vision France acquisition, also known as Abby West. Thus, technology purchases part of that acquisition will have been fully amortized, reducing total expenses by another 350,000 per quarter. Thus, we should expect to see our operating profits increasing at an even faster rate than EBITDA as the business scales. The result of the quarterly decline in year over year revenue and the decline in year-over-year total expenses is that the operating loss for this quarter was 3.1 million flat at the same quarterly period last year. The 1.7 million decrease in revenue and decline in margins resulted in a $2.6 million decline in gross profit when compared to the prior year. However, that was offset by a commensurate 2.6 million decrease in total expenses. The year-to-date comparisons fared even better. On a year-to-date basis, the increase in year-over-year revenue and slattish expenses resulted in a year-to-date operating loss of only $3.3 million compared to an operating loss of $5.4 million for the comparable prior year period. That's a $2.1 million improvement. Our focus continues to be adjusted EBITDA as we believe it gives a clearer view of our performance by stripping out non-cash accounting-related expense items like depreciation, amortization, and share-based payments. For the second quarter, adjusted EBITDA was $300,000 compared to $1.7 million last year. And our adjusted EBITDA margin was 1% compared to 4.9% last year. On a year-to-date basis, adjusted EBITDA was $2.9 million which exceeded the prior year by about 700,000, or 31%. We ended the quarter with 18.1 million in cash. That's an increase of 1.1 million from the end of last quarter, and the amount outstanding on the line of credit decreased by 400,000. Further, our credit facility remained strong at 35 million, with only 5.1 million outstanding. In fact, we recently extended the credit facility until August of 2028. The line of credit is still expandable to as much as 65 million in the event we identify an acquisition target. And BMO even doubled the level of permitted share buybacks under the facility. Note, we did renew our NCIB in January of 2026. and that NCIB renewal allows us to purchase as much as 1.8 million shares. The NCIB was active in the month of May, and we acquired over 200,000 shares for 1.2 million. Total assets at quarter end were 140.5 million, an increase of 1.8 million from the prior quarter end. Our balance sheet remains very strong. I do want to mention that on our last earning calls, we suggested that we will likely have to make incremental investments in inventory to support our new product introductions and to support our sales forecast for the remainder of the year. After having declined by as much as $9.5 million since peaking in the second quarter of 2023, inventory balances at quarter end were $15.1 million. That is an increase of $3.2 million during this quarter. Unfortunately, we anticipate further investments in inventory to be necessary as we've entered into this tight supply cycle driven by the demand from AI data centers and high performance computing. And prices are surging and we need to invest incrementally to maintain margins. Total liabilities of the quarter end were 46.2 million. That's an increase of 1.8 million from the prior quarter end. We did see the value of trade payables increased by 3.1 million from the end of fiscal 2025, but that's largely related to the recent inventory purchases. On the other hand, lease liabilities decreased by 400,000 as we continue to make rent payments. Perm loans decreased by 300,000 as we continue to make principal payments. And I should mention that we expect the term loans related to the High Vision France acquisition to be largely paid off by the middle of fiscal 2027. As Mirko suggested, the company continues to experience robust underlying demand across its key markets, so the timing of certain deliverables has shifted to later periods as a result of procurement delays, customer approval cycles, and supply chain constraints. Recent geopolitical developments involving government priorities have contributed to a reprioritization of spending across certain defense and government customers. We are still experiencing procurement bottlenecks limiting the ability of the Department of War to initiate new programs, increase production rates, and commit to larger, longer-term purchases. We continue to monitor funding of government agencies, like delays in the Department of Homeland Security funding, as an example, which have also impacted the timing of deliveries. Meanwhile, enterprise and broadcast customers are dealing with competing priorities of AI infrastructure, cloud optimization, and cost reduction initiatives. Despite these near-term, mid-term timing pressures, the company remains confident in its long-term growth prospects and continues to target consistent double-digit revenue growth over time. Unfortunately, growth may vary from quarter to quarter based on procurement timing, customer delivery schedules, and the macroeconomic conditions. Thus, we are lowering our expectations for the full fiscal year. We are now anticipating revenue between 140 and 142 million for fiscal 2026. And although we are monitoring supply chains closely, we expect margin compression resulting in margins closer to 70% in the near term. That concludes my prepared remarks. I'm passing the microphone back to you, Mirko, and then we'll open the floor to questions.